Combined sales of the two most common types of chips that store data in computers and electronics will fall 1 percent this year and 2 percent next year, compared with earlier projections for 1 percent growth this year and 6 percent next year, Merrill analysts including Simon Woo said in a note to clients on June 6.

Merrill's report dampened earlier optimism over chips, fueled by market researchers such as Gartner Inc and IC Insights, which in the past month raised their projections for semiconductor industry revenue.

"There may have been too much optimism about the semiconductor industry and this is a reality check," said Jung Kyun-sik, who helps manage the equivalent of US$250 million at Shinhan BNP Paribas Investment Trust Management Co in Seoul.

Boise, Idaho-based Micron Technology, the world's second-largest computer memory maker during the first quarter, and Nanya Technology, Taiwan's largest computer memory maker in the latest quarter, were cut to "sell" from "neutral" by Merrill.

SanDisk Corp, the last company in the industry that Merrill rated a "buy," was cut to "neutral."

The brokerage also cut its earnings estimates for this year and next for Infineon Technologies AG, Europe's largest chipmaker, and Taiwan's Powerchip Semiconductor Corp (力晶半導體), the world's largest supplier of made-to-order chips. Merrill downgraded its rating on top memory chipmaker Samsung on April 15.

The industry-wide downgrade was mainly sparked by stronger-than-expected capacity buildup of flash memory chips known as NAND -- used to save pictures and songs in hand-held products such as digital cameras and mobile phones -- that led to an oversupply beginning this month, according to Merrill.

The worse-than-expected outlook for NAND will spill over to makers of computer chips known as dynamic random access memory, or DRAM, as both types of semiconductors can be produced with the same facilities, Merrill said.

Merrill cut its projections for average prices of both NAND and DRAM by 13 percent for this year and 23 percent for next year.

"The latest capacity increase in NAND has been much stronger than expected," the brokerage report said.

Suwon, South Korea-based Samsung, the world's largest maker of both NAND and DRAM chips, projected in April that NAND demand would exceed supply during the second quarter.

Researcher Gartner said last month that NAND supply would turn to a glut during the current quarter.